A Nice Little Side Hustle
September 9, 1992.
I was watching the television news from the twenty-eighth-floor office of Lee Energy headquarters near Harvard Square in Cambridge.
The anchor’s voice rolled through the room.
I leaned back into the sofa and let my thoughts drift.
...It worked almost too well.
The second riot I remembered from my previous life had never happened.
The Bush administration had acted early, following the recommendations in my letter.
In the original timeline, the riot should have lasted three days and left a trail of bodies in its wake.
Forty-seven official dead, more than six hundred injured, seventeen more dead from secondary causes, and property damage from arson and looting alone that topped three hundred million dollars — a catastrophe by any standard.
A Black laborer who died after being knocked down by a water cannon during the protest. A white police officer crushed under a truck during the crackdown. A child who lost an eye to a rubber bullet. A wife who hanged herself because her husband’s insurance had been denied on the grounds that he had taken part in the demonstration. An elderly couple beaten and stripped of everything they owned by looters, then dead not long after from the aftereffects. A schoolgirl who had been walking down the street for no reason at all and was clubbed to death as if that were perfectly normal.
In a way, the letter I sent Bush had done more than advance my own interests; it had saved all of them.
To make that happen, I had canceled the speeches of half-mad political hacks before the riot could ignite, had the National Guard deployed in advance, and had the Labor Day gathering dissolved peacefully before it ever became a spark.
Bush, who should have suffered a drop of more than nine points in the polls, instead came out of it with a one-point gain.
He now had the image of a capable administration that had cut off a crisis before it could spread.
...Of course, that doesn’t mean Bush is going to win reelection.
I had changed history, yes, but not so much that I wanted to trigger a cascade of butterfly effects.
So I had only meddled enough to keep from tilting the board too far in Clinton’s favor.
I’m sure I’ve turned an overwhelming loss into a narrow one. That alone should be enough to prove the value of my letter.
What mattered was that Bush now owed me one.
However lame-duck he might be, however soon the office would change hands, it was still important to be wrapped in the president’s halo, even if only for a short time.
And the project I was about to pursue would end long before Bush’s term did, so it was of no concern.
Besides, even if he loses reelection, Bush is still a titan of business with enormous influence...
George H.W. Bush.
In truth, he was not impressive because he was president; he was president because he was already impressive.
A Yale man, a billionaire businessman who founded a major oil company in Texas, a congressman turned UN ambassador, head of the U.S. liaison office in China, CIA director — a super-elite who had done everything except perhaps walk on water.
His network stretched across politics, business, and intelligence, and that web would not vanish when he left office. If anything, once the restraints of incumbency were gone, he would be able to move even more freely.
He had strong ties to Wall Street power players and oil firms across the country, so there was no downside to staying on good terms with him.
He might even end up being more useful than Clinton, who would become president next.
Now that the White House is mine, why not go and kick Britain around a little? Before I head into the North Sea, I’d better make some easy pocket money.
I was planning to use this process to multiply my pocket money — no, my fortune — a hundredfold.
* * *
Two days later.
I called three men to the conference room on the twenty-sixth floor of Lee Energy headquarters.
Vito sat down while pulling a contract template from his briefcase.
Søren had already propped his pen on top of an open financial report.
Wolfman was leaning against the window, drawing a long line of cigar smoke into the air.
The three men of the Hamilton family.
Vito handled legal matters, Søren took care of taxes, and Wolfman handled financial trading — each of them helping me in their own specialty.
"You called for me, Chairman."
Wolfman greeted me with the kind of respectful bow that was common in the East.
He had recently been officially brought in as Lee Energy’s head of investment management.
He had made a name for himself as an independent trader on Wall Street, but after the Black Bog short-selling operation, he had decided to follow me.
At first he had acted as casually as if he were dealing with a friend’s son, but after signing the formal contract, his attitude changed.
Now he called me Chairman and used honorifics.
Søren took his seat and said, "You summoned us suddenly, so I assumed it was serious, Mr. Lee. I heard this was a new investment. How large is the scale?"
"Quite large. We’re going to short the pound."
"...You mean the British pound?"
Vito tilted his head.
Wolfman set the cigar down in the ashtray.
"Hmm. Shorting a stock and shorting a currency are worlds apart. Mind if I ask why?"
Attacking the share price of a single company and attacking the currency of an entire country was like the difference between picking a fight with an ant and picking a fight with an elephant.
I answered calmly.
"Because Britain is tied to the European Exchange Rate Mechanism."
ERM, the European Exchange Rate Mechanism.
Since its introduction in 1979, the system that kept European exchange rates within a fixed band had been regarded as one of the cornerstones of European economic integration.
"Britain joined the ERM in 1990. The problem is that the exchange rate set at the time was too high. The pound was locked in at an overvalued level against the Deutsche Mark."
"Overvalued... meaning the currency is worth more than the real economy can support?"
"Exactly. It’s like a flyweight boxer swaggering into a heavyweight ring. He doesn’t belong in that weight class, but he’s forcing himself to stand there among the heavyweights, and sooner or later he’s going to get knocked out."
Søren asked, and I kept going.
"The British economy is in recession right now. Unemployment is soaring, so they should be cutting interest rates to stimulate growth. But because they’re tied to the ERM, they can’t lower rates. Still, they have no choice but to lower them anyway."
"If they cut rates, the pound will fall and break out of the exchange band set by the ERM. I’d imagine that would be the country’s biggest humiliation since the Suez Crisis."
Wolfman understood my point quickly.
I continued, showing them the exchange-rate chart I had printed out.
"Right now, the Bank of England is burning through reserves to defend the pound. On the surface, it looks like they’re holding the line. But I don’t think the Bank of England alone can withstand selling pressure from the entire market. Britain’s foreign-exchange reserves are only about forty-four billion dollars. If American hedge funds coordinate and hit it together, that’s not a size they can survive."
"Would American hedge funds really bother to go after Britain?"
Vito raised the most basic objection, and I answered it briefly.
"I believe they will. In fact, I can’t think of a reason they wouldn’t."
As a regressor, I knew the future that would unfold over the next week.
September 16, 1992 — Black Wednesday.
George Soros’s Quantum Fund, Bruce Kovner’s Caxton Associates, Paul Tudor Jones’s Tudor Investment, and more — the giant hedge funds of Wall Street would throw themselves at the pound and bet on its collapse.
The Bank of England would grit its teeth and try to hold out, but it would eventually fail to defend the currency, and Britain would suffer the humiliation of being effectively forced out of the ERM.
In a single day, the pound would lose fifteen percent of its value and the Bank of England would burn through billions of dollars.
Meanwhile, George Soros would make more than a billion dollars in a single day and carve his name into history.
I remembered everything: the capital deployed, the leverage ratio, the entry point, the exit point, and the final return on what would go down as one of the most successful currency speculation trades in history.
The reason was simple.
I had learned the case like a textbook example during new-hire training when I landed my first job on Wall Street.
There was exactly one week left until September 16.
"A few days ago, through Martin Channing, I sent a warning to the Bank of England. I told them the pound was in danger and that they should consider leaving the ERM right away."
"And the response?"
"Ignored, of course. Well, naturally. Who would take a letter from some young Asian country bumpkin immigrant kid from America seriously?"
Wolfman let out a dry laugh.
"Proud as peacocks, those British."
"Yes. So I decided to show them instead."
I stood up and walked to the window.
"We’re going to build a short position in the pound a little earlier than the other hedge funds. If the size is large enough, the Bank of England will start to panic. Then the attitude they had toward me when they were ignoring me will change."
"So you want leverage. What scale should we aim for?"
"After the cost of acquiring Black Bog, the capital expenditures, taxes, and the loans I secured against gold bullion and crude oil, I have about one hundred million dollars in pure cash that I can deploy."
One hundred million dollars in 1992.
An amount comparable to the market cap of a decent mid-sized company.
The fact that a nineteen-year-old college student held that much cash was absurd enough on its own... but what I was about to say was even more absurd.
"I’m putting all of it in. And I want one hundred times leverage."
The conference room fell silent.
Vito, Søren, and Wolfman stared at me blankly, like dead men still standing.
...Thunk!
Ash fell from the end of Wolfman’s cigar.
Søren’s glasses slid down his nose.
Vito couldn’t even close his gaping mouth.
Ignoring them, I went on.
"We’re going to short one billion dollars’ worth first. Get ready. I’ll tell you the entry timing separately."
"W-wait just a second..."
Wolfman opened and closed his mouth like a goldfish.
"Chairman. Forgive me, but... do you understand what one hundred times leverage means? If the pound moves just one percent against us, the entire principal will vanish. No — not just the principal. You’d owe more than that."
"I know. But the pound is never going up."
It was a position I could take because I knew the future.
I had verified, and reverified, and verified again — tens, hundreds, thousands, tens of thousands of times — that the fate I knew and the flow of the present did not diverge, and every time the indicators matched what I remembered.
It wasn’t merely a matter of timing a rise or fall. This was about finding a crack in the monetary system between nations and driving straight through it, which made unexpected variables even less likely.
And even if some absurd butterfly effect somehow did appear and force my position to be liquidated, I had three more strategies lined up to recover the principal.
Flap—
I shook the exchange-rate chart.
"The Bank of England’s reserves are already down to the bottom of the barrel. They’ve been quietly buying dollars at night for the last few days. That means they don’t have many bullets left to spend on defending the pound."
"Haa..."
Wolfman ran a hand back through his hair.
"Well, you did this with Black Bog too. When you said you were going to short it with twenty times leverage, I thought you were being reckless. But you made two hundred million dollars in less than an hour that day."
Cold sweat beaded on his forehead.
"I’ll follow you, Chairman. I felt it the first time I met you in my son’s dorm. This man is different."
"I feel the same."
"Me too."
Søren and Vito followed in turn.
I nodded.
"All of you, set your positions. One hundred times leverage on the pound short."
To people who only knew the ordinary margin rules of stock trading, one hundred times leverage would sound insane — or impossible.
But in the global FX market and over-the-counter derivatives market of the early 1990s, the place was basically a lawless wasteland where hedge funds ran free of meaningful regulation.
Unlike stocks, where daily price movements were extremely small, currency trading between countries could be structured into contracts with prime brokers and collateral agreements that allowed for 100x leverage — and even 200x, highly dangerous arrangements signed in secret again and again.
In fact, not long after, Long-Term Capital Management would go on to weaponize Nobel Prize-winning economists and command the global financial markets with a staggering effective leverage of 250 times, right up until its collapse in 1998.
Closer to home, in this very pound crash, George Soros’s Quantum Fund would also use complicated derivative structures combining futures and options to build positions worth dozens or even hundreds of times its principal, sinking its teeth into the Bank of England’s throat.
Wall Street in 1992 was a golden age of greed and madness, a time when, so long as collateral and credit were solid, you could borrow insane amounts of money without anyone blinking.
...That’s why I’ve been obsessed with credit all this time.
And now that I held vast amounts of physical gold bars and a giant Texas oil field as collateral, there was no reason for Wall Street banks to refuse me 100x leverage.
Wolfman, Søren, and Vito all turned grimly solemn.
"I’ll contact the prime brokers at Goldman Sachs and Salomon Brothers at the same time. At 100x leverage, the margin requirements will be strict, but if we cross-collateralize your gold bullion with the crude-oil futures position, the negotiation should work. We’ll also secure an additional liquidity line just in case of a margin call."
"If we’re talking about ten billion dollars in foreign-exchange gains, federal tax alone is thirty-one percent. Fortunately, Lee Energy is a Texas-based corporation on paper, so there’s no state income tax. And if we structure the position through the special-purpose vehicle we established in the Cayman Islands, we can defer the tax event and also make use of the withholding-tax exemption clauses under the U.S.-U.K. tax treaty. Of course, with offshore tax enforcement tightening, every transaction record will have to be documented perfectly."
"Shorting the FX market is still less heavily regulated against manipulation than stocks, but at a billion-dollar scale, the British financial authorities will definitely be watching. That said, we’re not incorporated in Britain, and the trade will be executed in New York, so jurisdictional issues should keep direct sanctions off the table. Still, I’ll retain a local law firm in advance to handle any potential litigation from the British side. As it happens, I have connections with Slaughter and May, which is considered one of Britain’s top firms. Shall I contact them?"
It was time to move.
This was going to be one hell of a side hustle.
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